5 Factors to A Successful Merger & Acquisition [By Josephine Tam]

Analysts have forecasted that the outlook for 2015’s Mergers and Acquisitions (M&As) is set to continue to rise. Dealmakers remain positive about the potential for deal-making this year, with a focus on the North American and Asia Pacific (APAC) regions in particular. M&As in the healthcare and pharmaceutical industries are predicted to be most active in 2015, followed by technology and telecom-related deals. Over the next year, the key drivers of these deals will be the combination of willing sellers and buyers with access to financing, cash reserves and large opportunities in the emerging markets.

Nevertheless, research indicates that at least fifty percent of M&As are unsuccessful. What, therefore are the key factors that lead to a successful M&A? We have compiled a list of the top five factors that senior management, investors and strategists should be aware of and should address to ensure a successful M&A journey.

Factor 1: Be Clear About Your Objectives

Before embarking into an M&A, it is of paramount importance to clearly define the objective behind this strategy. There are many reasons to undertake an M&A, such as to achieve increased market share, to expand into new geographical areas, to have access to new customer bases or to establish a new product or service line. The key questions to ponder would be:

  • What would you like to achieve out of this deal?
  • Is this deal in line with your mid- to long-term strategic goals?
  • Is this the most feasible strategy available to you?

Essentially, these objectives will form the basis of the target evaluation criteria and screening metrics. These, in turn, will assist the buyer in identifying potential target companies, so as to further evaluate the potential target company’s compatibility. Recent research indicates that buyers are becoming increasingly sophisticated and selective in choosing the right targets. In fact, these buyers are willing to pay a premium for targets that meet their selection criteria and are in line with their growth strategies.

Factor 2: Look Internally Before Looking Externally

Before embarking on an M&A, a buyer should first assess their internal capabilities and resources, to evaluate how ready they are in addressing the company’s greater M&A goals. A majority of companies have a relatively small corporate planning and business development team to perform the necessary due diligence required in a prospective M&A deal. However, in order to perform a comprehensive due diligence on potential target companies, to integrate the acquired company and fully capture its synergies can require far more resources than the buyer may have anticipated. Therefore, it is vital to have a clear understanding on the availability and quality of your internal resources to ensure a smooth and effective M&A process.

Factor 3: Have a Rigorous Due Diligence Process

One critical success factor in a successful M&A lies in having a rigorous due diligence process. Due diligence tends to focus on the historical performance and trends of a potential target company so as to identify its potential liabilities and risks. While it is important to look into the past, the evaluation should not be at the expense of the present and predictable future of the potential target company. Rigorous due diligence does not just address the quantitative side of the business. To gain the full benefit of the M&A, due diligence must also consider a company’s qualitative elements, such as its commercial, operational, human resource, corporate governance and regulatory aspects.

Issues that could surface through the due diligence process may include potential contractual obligations that have yet to be recognized in the potential target company’s profit and loss (P&L) statement, outstanding receivables or tax liabilities, and its employee or key personnel turnover rate. These issues will need to be resolved, whether at the pre- or post-deal stage. In the best interest of the buyer, these issues must be carefully evaluated as they will have a great impact on successful closing the deal, the final value of the deal and any improvement work that must be done at the post-deal stage.

Factor 4: Consider Your Synergies & Value Creation

The success of an M&A is largely determined by its ability to capture the forecast synergies which ultimately will translate into increased shareholder value. Many buyers target these synergistic benefits through revenue improvement as well as direct operational cost reductions.

To extract the full potential of combining businesses, the buyer should critically assess the mechanics of how synergy will be achieved and how the combined entity will be stabilized to create greater value under the new common leadership, operations and infrastructure. This analysis should include operational and functional improvement plans that can be implemented quickly to transform the combined business to one operation that is greater than either company would be on a standalone basis.

Factor 5: Integrate Your Culture & Your People

A company’s corporate culture is defined as its shared values, beliefs, attitudes, characteristics and behaviors that determine how the company’s employees and management interact outside the business context. Often, corporate culture is implied and develops organically over time from the cumulative traits of the people that the company hires. Undoubtedly, corporate culture is a soft element of a business, but it matters greatly to the success of an M&A.

Failure to recognize culture clashes in an M&A pitfall may result in:

(a) An unfavourable employee turnover rate

The feeling of uncertainty created by an M&A may cause employees from both companies to feel nervous, as they are unsure of what the transaction will entail, whether and how they will fit into the setup of the new organization. These ‘soft’ issues often determine how people feel about their new environment and must be managed carefully.

(b) The loss of key executives

The long lead time in establishing a new leadership and organization structure in the new setup may drive talented executives away. The disruption of the new entity’s transformation momentum not only impedes the performance of both companies but also affects the crystallization of the forecast synergies at the post-deal stage.

To smoothen out these M&A integration issues, commit to a culture and resolve these people issues early. Communicate clearly and quickly with the new organization’s top management to retain your human talent, from the junior to the executive level, and control the turnover rate.

Conclusion

There is not a “one size fits all” approach to a successful M&A. However, detailed planning and careful management of these five critical success factors at each stage of an M&A will ensure a smooth and fruitful journey.

 By Josephine Tam.

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